Dr. P.V. Viswanath
Navistar Gets Back on Track
Navistar International Corp., slowed by its own two-year financial reconstruction, is beginning to accelerate again as Chief Executive Dan Ustian eases the 106-year-old heavy truck and school-bus maker into new ways of thinking, manufacturing and getting revenue.
Much of Navistar's momentum comes from Mr. Ustian, who took over as CEO in 2003. He has helped the company evolve into an assembler of military vehicles, boosted its presence in other countries and formed partnerships to speed development and delivery of new products. He also maintained control and liquidity as Navistar spent time cleaning up accounting errors on its books.
The errors and subsequent delay in financial filings led to a one- year delisting of the stock. Navistar returned to the New York Stock Exchange in June after restating its financial results for fiscal 2002 through 2005.
"Getting our books right was a distraction for us," Mr. Ustian said. "Now that we have pushed that off our shoulders, I would argue that we are hitting the ground even harder."
Navistar's progress was highlighted earlier this month when the Warrenville, Ill., company swung to a third-quarter profit despite one of the worst truck-market downturns in the U.S. in more than 30 years. Navistar had a profit of $272 million, compared with a loss of $4 million last year. The company also boosted its 2008 profit forecast to between $467 million and $548 million. The results prompted JPMorgan analyst Ann Duignan and at least three others, to upgrade the stock. Ms. Duignan, who now has an "overweight" rating, expects Navistar to achieve 2009 earnings of $10.96 a share, up from her previous estimate of $9.12.
"Our sense is that Navistar could see significant multiple expansion if management continues to beat expectations, particularly in the truck segment," Ms. Duignan said. "As such, given current valuations, combined with recent operating performance, we believe the reward-to- risk ratio for Navistar is pretty compelling currently."
According to FactSet, Navistar has a forward-looking price-to- earnings ratio of 8.7, compared with 10.7 for the industry and 11.9 for larger rival Paccar Inc., which makes commercial trucks and parts.
However, concerns remain about Navistar's exposure to the slowing North American market, which accounts for 90% of overall revenue. Truck-industry sales may fall as low as 250,000 this year from 319,000 last year, according to Navistar's forecast. Many companies accelerated truck purchases last year to beat fuel-emissions changes that started this year and added costs to the trucks.
"We believe the primary risk for Navistar is a sharp downturn in economic activity, which could lead to a reduction in demand for Navistar trucks and engines," UBS Investment Research analyst Henry Kirn said. "Additional risks include rising steel costs, pricing pressures, legal issues and warranty issues." He maintained a "neutral" rating.
Mr. Ustian intends to offset the slowing market by growing internationally and using partnerships to control costs. The company has a deal to build trucks with India's Mahindra & Mahindra Ltd. and formed a partnership with U.S.-based Caterpillar Inc. to help sell Navistar's trucks internationally.
Under that deal, Navistar will build a construction truck that will carry the Caterpillar brand name and will go on sale in the U.S. by 2010 or 2011. Outside the U.S., Navistar's products will be sold through Caterpillar dealerships, providing easy access to new markets at little cost. "We have to think of new ways of doing things and be willing to use what is already out there," Mr. Ustian said.
The growth may help Navistar fend off competition from Paccar, as well as from Daimler AG's Daimler Truck unit and Oshkosh Corp.
In the school-bus arena, Navistar is changing into a one-stop shop that deals directly with customers from just a second-tier supplier. Previously, it filled chassis orders and supplied them to another company that then attached the body.
"We really had no control over the end product such as how it looked or how it performed," Mr. Ustian said. "Now we are going to the school system, and they are telling us what they need, and we are building the whole thing for them."
The move should generate more profit as Navistar expands from the U.S. into countries such as Mexico. Its Mexico subsidiary is joining with a Brazilian bus-body builder to build entire buses for that region starting next year.
Rounding out Navistar's offerings are its military vehicles, a sector the company wasn't competing two years ago. Today, Navistar generates $3.5 billion in revenue from the military.
"Military is what separates us from the rest," Mr. Ustian said. "For years, the military had used specialized chassis for their vehicles. We convinced them that it would be better to use commercial chassis that could be tailored to meet their needs."
For instance, as U.S. military presence grows in Afghanistan, Navistar can use its skills to reshape trucks to better fit the rocky terrain of the country. The products the company produces for Afghanistan are much lighter and more flexible than what it would produce for flat-terrain countries such as Iraq.
Last week, Navistar won a $752 million order from the Defense Department to produce a version of its mine-resistant, ambush- protected family of vehicles, for use in Afghanistan. Production will start in October at Navistar's West Point, Miss., plant, with delivery of 822 vehicles to be completed by February. The company also received two Army contracts for $92 million to provide 400 cargo trucks and 120 tractor trailers.
Still, the trick for Navistar will be containing costs while contending with a softening truck economy expected to remain in the U.S. through next year.
"The industry is at its lowest point in maybe 30 years," Mr. Ustian said. "We think that as the economy strengthens, we will see demand increase, but we are continuing to take cost-cutting initiatives, and we are growing both our production and sales outside of the U.S."